Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

In this weekly insight, <a href="https://www.smartkarma.com/insights/idemitsu-if-it-s-war-they-want" target="_blank">Mangalores</a> emerge in the <a href="https://www.smartkarma.com/entities/109" target="_blank" data-smartkarma-citation="entities:109:1">Idemitsu Kosan Co Ltd (5019 JP)</a> 's family/management confrontation, KKR's offer for <a href="https://www.smartkarma.com/entities/24157" target="_blank" data-smartkarma-citation="entities:24157:1">Pepper Group Ltd (PEP AU)</a> is credit deficient, further consolidation expected in the <a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">FamilyMart UNY Holdings Co Ltd (8028 JP)</a> /CVS space, while the long-term reward of going "long the stub" is plainly apparent.(Market capitalisation and liquidity discussed below are in US$. Liquidity is assessed on a 3-month average)<h2>M&amp;A</h2><ul class=""><li><a href="https://www.smartkarma.com/entities/109" target="_blank" data-smartkarma-citation="entities:109:1">Idemitsu Kosan Co Ltd (5019 JP)</a>(Mkt Cap: $3.9bn; Liq: $26.3mn) <ul><li><a href="https://www.smartkarma.com/profiles/25" target="_blank" data-smartkarma-citation="accounts:25">Travis Lundy</a><a href="https://www.smartkarma.com/insights/idemitsu-if-it-s-war-they-want" target="_blank">twice</a> <a href="https://www.smartkarma.com/insights/is-idemitsu-issuance-injunction-intromittence-irrecusable" target="_blank">revisited</a> Idemtisu’s fractious family/management relationship as it reached new heights (plumbed new depths?).</li><li>Emboldened with shareholder support after last week's AGM – despite the family’s best efforts – management announced a global offering of 48mn shares or ~30% of currently issued shares.</li><li>Proceeds from the offer are ostensibly to be applied to this &amp; that, but the unmistakable impact is reducing the family’s stake to 26.1% from 33.92%.</li><li>The family has filed an injunction, on which Travis enunciates its core argument extremely/remarkably/outstandingly well. </li><li>It’s a Mobius strip debate – the Tokyo District Court, where the injunction was filed, often aligns its judgement/verdict with shareholders. Will the Court interpret the offer, one that dilutes a minority shareholding, as being perceived to have ill-intention or extremely unfair? In fact, do "shareholders with minority control have the right to entrench that position?".</li><li>The other end of the spectrum is that the offer is being done at a market price, which is difficult to call unfair. There is also clear evidence (after the AGM) of non-family majority support for management's stance and efforts to integrate with Showa Shell. Does the Court side with the family, but not the non-family minorities who backed management?</li><li>It’s complicated. Mangalores-style.</li></ul></li><li><a href="https://www.smartkarma.com/entities/24157" target="_blank" data-smartkarma-citation="entities:24157:1">Pepper Group Ltd (PEP AU)</a> - (Mkt Cap: $487mn; Liq: $0.5mn) <ul><li> <a href="https://www.smartkarma.com/profiles/263" target="_blank" data-smartkarma-citation="accounts:263">Pranav Rao</a><a href="https://www.smartkarma.com/insights/pepper-group-kkr-throws-in-some-spice" target="_blank">discussed</a> KKR’s “okay” non-binding offer for Pepper at A$3.60/sharte + A$0.03 in divs.</li><li>"The rationale behind this transaction stems from the withdrawal of the Big Four from some aspects of consumer lending", on which I briefly touched in a prior <a href="https://www.smartkarma.com/insights/last-week-in-event-space-4-june-2017" target="_blank">summary</a>.</li><li>Pranav interprets the offer as feeling light. And you'll need Chairman Seumas Dawes (31.5% shareholder) to support the offer. Pepper has rallied hard this year (~50%+ YTD),  so staying on the sidelines until a binding offer materialises makes some sense - mindful of the recent <a href="https://www.smartkarma.com/entities/8996" target="_blank" data-smartkarma-citation="entities:8996:1">Fairfax Media Ltd (FXJ AU)</a> situation. The current gross annualised <a href="https://www.smartkarma.com/tools/mna/477" target="_blank">return</a> is 11.5%.</li><li>Still, the word on the street was that KKR, Oaktree, and Pepper were, at one point earlier this year, at an advanced stage of assembling a shadow lending outfit. I wouldn't be surprised to see an official offer from KKR. </li></ul></li><li><a href="https://www.smartkarma.com/entities/320" target="_blank" data-smartkarma-citation="entities:320:1">FamilyMart UNY Holdings Co Ltd (8028 JP)</a> - (Mkt Cap: $6.9bn; Liq: $44mn) <ul><li>Travis <a href="https://www.smartkarma.com/insights/familymart-to-lift-stake-in-kanemi-de-facto-takeover-minorities-beware" target="_blank">delved</a> into FamilyMart lifting its stake in <a href="https://www.smartkarma.com/entities/19614" target="_blank" data-smartkarma-citation="entities:19614:1">Kanemi Co Ltd (2669 JP)</a> to 52.47% from 26.05% (of voting rights), with 10% sourced from <a href="https://www.smartkarma.com/entities/18448" target="_blank" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a> (FamilyMart's de facto parent) and the remainder from (mainly) Kanemi's founding family members.</li><li>As FamilyMart + Itochu, collectively holding ~36% are deemed Specially Related Parties, no TOB is triggered from the acquisition. It's cheeky, but within the rules.</li><li>Travis previously <a href="https://www.smartkarma.com/insights/japan-cvs-sector-boots-on-the-ground" target="_blank">examined</a> the CVS sector  - there's a terrific table in this insight detailing the location, population &amp; expenditure per CVS - and what FamilyMart, Itochu, <a href="https://www.smartkarma.com/entities/1041" target="_blank">Seven &amp; I Holdings Co Ltd (3382 JP)</a> and <a href="https://www.smartkarma.com/entities/1040" target="_blank">Lawson Inc (2651 JP)</a>) "might do going forward after the completion of various large consolidations in the sector."</li><li>Both Kanemi and  <a href="https://www.smartkarma.com/entities/3896" target="_blank">Ucs Co Ltd (8787 JP)</a> (81.35%-held by FamilyMart) were mentioned in those insights. Maintaining their listings is questionable (85% of Kanemi's revenue go to FamilyMart) and Travis expects both companies to be taken private by FamilyMart in the not "overly" distant future. Both stocks have outperformed their parent, Kanemi by 18% &amp; UCS by 42% YTD.</li></ul></li><li> <a href="https://www.smartkarma.com/entities/625" target="_blank" data-smartkarma-citation="entities:625:1">Toray Industries Inc (3402 JP)</a> - (Mkt Cap: $13.7bn; Liq: $46mn) <ul><li>Travis <a href="https://www.smartkarma.com/insights/toray-buys-pacific-textiles-stake-from-founder-possible-lead-in-to-partial-offer-next-year" target="_blank">discussed</a> Toray buying 28.03% of <a href="https://www.smartkarma.com/entities/12638" target="_blank" data-smartkarma-citation="entities:12638:1">Pacific Textiles Holdings (1382 HK)</a> via a SPA, at $10/share. The SPA is expected to complete by the middle of this month.</li><li>What was not present in the <a href="http://www.hkexnews.hk/listedco/listconews/SEHK/2017/0630/LTN20170630299.pdf" target="_blank">HK Exchange filing</a>, but in a Japanese newspaper article, was Toray’s possible intentions: "by next year, Toray may increase its stake to over 50%, taking full control and making the company a subsidiary".  That would trigger a general offer. But the "50%" suggests a partial offer, potentially similar to <a href="https://www.smartkarma.com/entities/20829" target="_blank">Grand Baoxin Auto Group Ltd (1293 HK)</a>.</li><li>On the assumption the GO is launched in late June 2018 (after Toray's results) at a $12.70/share, the all-time high,  that translates to a spot price (post-announcement) of $10.85/share - 15-18 months out.</li><li>That's around 14% upside from the last closing price.  Throw in the dividend (~6%) - not bad. Not great.</li><li>Entering below $9 looks a better proposition, viewing an 18-month trade horizon. Pacific Textiles closed at $9.49.</li></ul></li></ul><h2>Stubs/Holdcos</h2><ul><li>In this <a href="https://www.smartkarma.com/insights/stubworld-the-framework" target="_blank">insight</a>, I introduced 650 parent vs holding relationships (or "stubs"), with at least one leg listed in Asia.</li><li>I constructed a dollar-neutral (i.e. long/short), currency-neutral, equal-weight, average return index of these 650 pair trades, represented by these parent/stub relationships. That index shows a gross compounded annual return (without considering borrow costs or commissions) of 11.1% over a five-year period. The trend is pretty evident.</li></ul><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/029/399/original/All%20Stubs%205%20July.PNG?1499424545" class="editor-image img-responsive" data-smartkarma-image-id="29399"></figure><ul><li>Subsequent insights will discuss sector comparisons within each country and across the region, together with absolute movements in the parent vs. its subsidiary.</li></ul>

In this weekly insight, Mangalores emerge in the Idemitsu Kosan Co Ltd (5019 JP) 's family/management confrontation, KKR's offer for Pepper Group Ltd (PEP AU) is credit deficient, further consolidation expected in the FamilyMart UNY Holdings Co Ltd (8028 JP) /CVS space, while the long-term reward of going "long the stub" is plainly apparent.(Market capitalisation and liquidity discussed below are in US$. Liquidity is assessed on a 3-month average)M&amp;AIdemitsu Kosan Co Ltd (5019 JP)(Mkt Cap: $3.9bn; Liq: $26.3mn) Travis Lundytwice revisited Idemtisu’s fractious family/management relationship as it reached new heights (plumbed new depths?).Emboldened with shareholder support after last week's AGM – despite the family’s best efforts – management announced a global offering of 48mn shares or ~30% of currently issued shares.Proceeds from the offer are ostensibly to be applied to this &amp; that, but the unmistakable impact is reducing the family’s stake to 26.1% from 33.92%.The family has filed an injunction, on which Travis enunciates its core argument extremely/remarkably/outstandingly well. It’s a Mobius strip debate – the Tokyo District Court, where the injunction was filed, often aligns its judgement/verdict with shareholders. Will the Court interpret the offer, one that dilutes a minority shareholding, as being perceived to have ill-intention or extremely unfair? In fact, do "shareholders with minority control have the right to entrench that position?".The other end of the spectrum is that the offer is being done at a market price, which is difficult to call unfair. There is also clear evidence (after the AGM) of non-family majority support for management's stance and efforts to integrate with Showa Shell. Does the Court side with the family, but not the non-family minorities who backed management?It’s complicated. Mangalores-style.Pepper Group Ltd (PEP AU) - (Mkt Cap: $487mn; Liq: $0.5mn)  Pranav Raodiscussed KKR’s “okay” non-binding offer for Pepper at A$3.60/sharte + A$0.03 in divs."The rationale behind this transaction stems from the withdrawal of the Big Four from some aspects of consumer lending", on which I briefly touched in a prior summary.Pranav interprets the offer as feeling light. And you'll need Chairman Seumas Dawes (31.5% shareholder) to support the offer. Pepper has rallied hard this year (~50%+ YTD),  so staying on the sidelines until a binding offer materialises makes some sense - mindful of the recent Fairfax Media Ltd (FXJ AU) situation. The current gross annualised return is 11.5%.Still, the word on the street was that KKR, Oaktree, and Pepper were, at one point earlier this year, at an advanced stage of assembling a shadow lending outfit. I wouldn't be surprised to see an official offer from KKR. FamilyMart UNY Holdings Co Ltd (8028 JP) - (Mkt Cap: $6.9bn; Liq: $44mn) Travis delved into FamilyMart lifting its stake in Kanemi Co Ltd (2669 JP) to 52.47% from 26.05% (of voting rights), with 10% sourced from Itochu Corp (8001 JP) (FamilyMart's de facto parent) and the remainder from (mainly) Kanemi's founding family members.As FamilyMart + Itochu, collectively holding ~36% are deemed Specially Related Parties, no TOB is triggered from the acquisition. It's cheeky, but within the rules.Travis previously examined the CVS sector  - there's a terrific table in this insight detailing the location, population &amp; expenditure per CVS - and what FamilyMart, Itochu, Seven &amp; I Holdings Co Ltd (3382 JP) and Lawson Inc (2651 JP)) "might do going forward after the completion of various large consolidations in the sector."Both Kanemi and  Ucs Co Ltd (8787 JP) (81.35%-held by FamilyMart) were mentioned in those insights. Maintaining their listings is questionable (85% of Kanemi's revenue go to FamilyMart) and Travis expects both companies to be taken private by FamilyMart in the not "overly" distant future. Both stocks have outperformed their parent, Kanemi by 18% &amp; UCS by 42% YTD. Toray Industries Inc (3402 JP) - (Mkt Cap: $13.7bn; Liq: $46mn) Travis discussed Toray buying 28.03% of Pacific Textiles Holdings (1382 HK) via a SPA, at $10/share. The SPA is expected to complete by the middle of this month.What was not present in the HK Exchange filing, but in a Japanese newspaper article, was Toray’s possible intentions: "by next year, Toray may increase its stake to over 50%, taking full control and making the company a subsidiary".  That would trigger a general offer. But the "50%" suggests a partial offer, potentially similar to Grand Baoxin Auto Group Ltd (1293 HK).On the assumption the GO is launched in late June 2018 (after Toray's results) at a $12.70/share, the all-time high,  that translates to a spot price (post-announcement) of $10.85/share - 15-18 months out.That's around 14% upside from the last closing price.  Throw in the dividend (~6%) - not bad. Not great.Entering below $9 looks a better proposition, viewing an 18-month trade horizon. Pacific Textiles closed at $9.49.Stubs/HoldcosIn this insight, I introduced 650 parent vs holding relationships (or "stubs"), with at least one leg listed in Asia.I constructed a dollar-neutral (i.e. long/short), currency-neutral, equal-weight, average return index of these 650 pair trades, represented by these parent/stub relationships. That index shows a gross compounded annual return (without considering borrow costs or commissions) of 11.1% over a five-year period. The trend is pretty evident.Subsequent insights will discuss sector comparisons within each country and across the region, together with absolute movements in the parent vs. its subsidiary.

Australia

Pepper Money Limited of Australia operates in targeted market segments and asset classes. The Company specializes in mortgages, asset finance, loan and broker servicing. Pepper Money serves customers in Australia and New Zealand.

Pepper Money (PPM AU)

Last Week, in Event SPACE (8 July 2017)

In this weekly insight, Mangalores emerge in the Idemitsu Kosan Co Ltd (5019 JP) 's family/management confrontation, KKR's offer for Pepper Group...

David Blennerhassett